Business Models for Large-scale Battery Storage Systems

The Swiss army knife of the energy transition

Introduction

Battery storage systems not only offer benefits for our environment, but also present significant economic opportunities. With the help of various business models, electricity costs can be reduced and revenues generated, as the storage systems can flexibly store electricity from the grid and also feed it back into the grid. 

One well-known business model is arbitrage trading, which is mainly used on the short-term or spot market. Battery storage systems store electricity from the grid when it is cheap and feed it back into the grid when electricity prices are high. The electricity is then traded with other market participants for specific time windows (15 minutes to 1 hour). Electricity prices are often particularly low when there is a lot of electricity from renewable sources such as wind and PV and high when there is little electricity from renewable energy sources.

Another business model involves participation in the balancing energy market. By storing electricity or feeding it back into the grid as required, battery storage systems can balance out fluctuations and keep the electricity grid stable. At the same time, power outages are avoided and the infrastructure is protected. The flexibility providers, i.e. the owners and operators of large-scale battery storage systems, are compensated financially by the responsible grid operator.

The energy transition in Germany has led to the increasing integration of renewable energies into the electricity grid. Last year, we were already able to cover over 50% of our electricity needs with renewable energy (Umweltbundesamt). However, these positive developments have also brought challenges, as the use of renewable energy sources such as wind and solar energy is volatile and unpredictable. In order to compensate for short-term fluctuations and forecasting errors in the electricity grid and ensure a reliable supply of electricity, various markets have been established as centralised marketplaces for trading electrical energy and grid services.

What are the electricity exchange and the balancing energy market?

The German electricity market is divided into various segments, including the electricity exchange with its spot and futures market as well as the balancing energy market.

• The electricity exchange is a marketplace where electricity producers, traders and large consumers can buy and sell electrical energy. Electricity prices here are determined by supply and demand.

• Spot market: This is where electricity is traded for short-term delivery (up to 5 minutes in advance). Prices on the spot market can vary greatly and are influenced by factors such as weather conditions, demand and the availability of power plants.

• On the futures market, electricity contracts can be concluded for delivery at a later date. This enables market participants to plan their electricity procurement and minimise price risks.

• On the balancing energy market, services are traded to stabilise the electricity grid and maintain the target grid frequency. In Germany, the balancing energy system consists of Frequency Containment Reserve (FCR), Automatic Frequency Restoration Reserve (aFRR), and Manual Frequency Restoration Reserve (mFRR), which are activated in this order depending on the severity of the frequency deviation. Due to the frequently occurring small frequency deviations in the grid, FCR is activated almost continuously, placing a constant load on the grid infrastructure. The use of large-scale battery storage systems can provide relief here due to their rapid response capabilities. If the grid continues to be unstable after FCR activation and frequency deviation exceeds a critical threshold, systems from aFRR and subsequently mFRR are gradually deployed.

Areas of application for battery storage systems

Spot trading

Similar to electricity generators, battery storage systems can also participate in trading on the short-term electricity market, particularly in day-ahead and intraday trading. Their purpose is to compensate for shortfalls or surpluses and thus counteract extreme price fluctuations. This is made possible by the intelligent marketing of electricity: when prices are low (more supply than demand), electricity is taken in, and when prices are high (less supply than demand), electricity is fed in. In this way, the operation of the storage system helps to smooth and reduce electricity prices.

Provision of balancing energy

Battery storage systems play a crucial role in the provision of balancing energy to compensate for fluctuations in the electricity grid frequency and maintain the constant frequency of 50 hertz. Thanks to their fast response speed, they can react within milliseconds and ensure grid stability. Accordingly, battery storage systems are active in FCR and aFRR. The potential and market design for mFRR currently do not allow meaningful participation. In general, the use of storage systems helps to reduce balancing energy prices and grid fees for end consumers.

Capacity market

A capacity market is also expected to be introduced in Germany in 2028 (see here). In countries such as Belgium and the UK, capacity markets are already an important source of income and are primarily used to provide secured capacity in extreme cases. Little is currently known about the market design or the framework conditions for a German capacity market, but further details are expected to be announced in summer 2024 (The Climate-Neutral Electricity System Platform).

Market developments and revenue stacking

The market design in Germany has been constantly evolving for years in order to offer battery storage systems more opportunities to create financial value. The switch to shorter and more frequent bidding and contract periods and the opening of new markets (in particular secondary control services) allow market participants more flexibility. Various sources of revenue can already be combined in battery projects today, thereby increasing their profitability. Among other things, a storage system can participate in several markets at the same time as long as the output is divided between the different markets. This can mean, for example, that part of a storage system's output stabilises the grid, while another part of the storage system's output absorbs or delivers traded energy volumes from the electricity exchange. The following diagram illustrates an example day that shows the activities of a battery storage system on the various markets.

Conclusion

Large-scale battery storage systems offer a wide range of potential applications and business models that play an important role in stabilising the German electricity grids. Through their participation in various electricity markets and the provision of flexibility services, they contribute to the integration of renewable energies and to reducing energy costs for consumers. Due to their versatility, large-scale storage systems are therefore also referred to as the "Swiss army knife" of the energy transition.